Apple, Inc. (NSDQ:AAPL), currently the world's largest company, is an innovation machine. This past decade has witnessed the rise of a true consumer goods juggernaut, and the subsequent decline of once-famous competitors such as BlackBerry Ltd. (NSDQ:BBRY). The introduction of the iPhone in 2009 and the subsequent release of newer models with better applications and features has seen Apple's market share climb to around 16% today. Undoubtedly, newer designs and more innovation will bring more market share, no?

Apple's stock has recently come under fire from investors who see a potential slowdown in Apple's revenues and profits in the future. While the markets for Apple products are nowhere near saturation, theoretically such worries make sense - it gets incrementally harder and harder to grow the larger the company becomes.

Besides growth expectations, I see the following as the primary reasons why an Apple acquisition of BlackBerry makes sense.

It's Cheap

The consistent decline in sales, market share, and stock price makes BlackBerry an attractive target. The once-mighty BlackBerry, which held over 50% of the global market share for smartphones, traded at $230 per share. Today, the stock price is closer to $8 - a full 96.5% drop in value. This rapid loss in shareholder value inadvertently makes BlackBerry a prime acquisition target, since large Canadian stakeholders (pension funds, banks, etc.) of BlackBerry have links to the Canadian government, who may have a vested interest in seeing these stakeholders compensated fairly in the short-term, providing little opposition to such a takeover if enough value is presented to the shareholders who stuck it out.

BlackBerry Has A Different Target Segment

BlackBerry's core business focuses on corporate clients and other security-oriented organizations, a much different market segment than the mass consumer market which Apple, almost exclusively, caters to. The end of fiscal year 2016 saw BlackBerry launching several new services and features, including a voice-encryption product for Enterprises (SecuSUITE) and a new professional cyber-security services division which will further enhance the company's security portfolio. The patents alone, to develop and integrate many of these features, hold real value to an acquirer that may be able to integrate such features into its own technology.

Security Matters

What BlackBerry brings to the average paranoid consumer is a double-dose of security. Widely considered to be the most secure of smartphone devices, heads of state all around the world use only BlackBerry mobile phones due to the company's security software and intellectual property, oft-considered to be the company's most valuable assset. This stronghold on the "secure smartphone" market may continue to gain importance, especially considering many of the recent security-related events involving Apple's battle with the FBI over the San Bernandino shooter's iPhone. Commenting on the hack that unlocked the San Bernadino shooter’s phone, one analyst recently stated, “…it is unknown how the hack operates or whether the hackers sold the flaw to any other agencies or third-parties, but if it is not disclosed to and fixed by Apple, it could leave anyone with an iPhone without a fingerprint sensor at risk of having their smartphone hacked (The Guardian, April 13, 2016).

Who Else Might Be Interested?

Interestingly, one major financial player did make a move for BlackBerry. In September of 2013, Fairfax Financial made a tender offer of US$4.7B to acquire BlackBerry after increasing its stake in the company to 10%. Instead of acquiring BlackBerry at that time, Fairfax Financial decided to purchase US$1B in convertible debt in November of 2013, with additional purchases thereafter. This offer may be considered to be generous today, given that the company's revenues at that time were substantially higher than today and the company has drastically fallen from grace, even more than before.

Another attempt was made to take a run at BlackBerry in 2015 when Microsoft retained Goldman Sachs and Deutsche Bank to begin an evaluation of the company. Microsoft had previously purchased Nokia's devices division for $7.17B, and was attempting to build its IoV (internet of vehicles) competency and expertise in mobile solutions to take advantage of an emerging market for the IoT (Internet of Things) and IoV.

Both attempts to buy BlackBerry were unsuccessful, though other rumoured "dance partners" for the company have included Chinese manufacturers such as Lenovo, Huawei, and ZTE. These companies have done well in the low-end device market, and BlackBerry has surprisingly performed quite well in the low-end market with its BlackBerry Curve smartphone. No bids have been placed, and the likelihood of an offer from these manufacturers remains quite low.

What is BlackBerry Worth Today?

The valuation of BlackBerry as a standalone business ranges between $7.60 and $8.60 based on a long-term growth rate ranging between 1.5% and 2.5%, with a WACC of 8.1% using a DCF model. The valuation assumes the business can grow faster than the current projection by about 2%, which is a fair increase in growth due to the acquirer itself. Other assumptions include a range of between $1B-$2B in synergies which will be gained through the acquisition, as well as a full depletion of hardware revenues, with a larger increase in software revenues post-2018.

Conclusion

If Apple felt confident enough in its ability to achieve the synergies necessary to make a BlackBerry acquisition meaningful, and the Canadian government is amenable to "green-lighting" this buyout, the concept of an Apple-BlackBerry deal should not be considered so far-fetched. The IP and security software platforms of BlackBerry combined with the different corporate customer target segment may provide Apple the potential "shot in the arm" analysts and shareholders are looking for, spurring additional growth. BlackBerry stock is currently trading near the centre range of their DCF valuation with conservative assumptions, so the timing may be just right. Maybe.

Apple Stock Articles & Video

Apple provided comments on the proposed Federal Automated Vehicles Policy paper on self-driving cars. The US administration is persuaded that the rise of self-driving cars is inevitable, and is mostly concerned with social impact and safety. Apple intends to leverage AI to ensure road safety, and seems to have initial road testing in mind.

Credit Suisse Analyst Kulbinder Garcha has restated Apple Inc. Stock at Outperform. The analyst claims that iPhone 7 builds will be at 87M units in December quarter, which will be an all-time high. Is Apple heading for a huge holiday quarter? Should investors buy AAPL stock?

Supply constraints and mixed signals from high-end Chinese consumers have weighed on Apple shares. I anticipate demand pull-through from Q1'17, suggesting that 10% y/y sales growth in China is attainable from Q2'17 onwards. This more optimistic scenario isn't priced into AAPL suggesting meaningful upside to earnings for the remainder of FY'17.

Apple Inc. has made preparations to start the holiday sales season on a high with a one-day sale on Black Friday. There are multiple reports of Apple releasing three iPhone models in 2018. With reports of up to 100M orders for OLED displays, Is Apple setting up for a massive FY 2018?

I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours

I am not an investment advisor, and my opinion should not be treated as investment advice.

I am not being compensated for this post (except possibly by Amigobulls).

I do not have any business relationship with the companies mentioned in this post.

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Comments on this article and AAPL stock

Only because Apple wouldn't pay what Chen thinks it's worth as now it's even worth less then it original asking price of $4.7B as a lot of its real estate has been sold. Apple. I. A type of a company that likes to build their own solutions in house. This is why they hired Dan Dodge.

55 • reply

virendra - Aug 25, 2016 at 08:47 AM

bullish

But wouldn't the Patents and IP of BlackBerry be worth a goldmine still? After all, they were leaders in secure communications.

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